Chapter 16 Mishkin & Eakins Banking Industry: Structure and Competition.
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Transcript of Chapter 16 Mishkin & Eakins Banking Industry: Structure and Competition.
chapter 16Mishkin & Eakins
Banking Industry: Structure and Competition
Copyright © 2001 Addison Wesley Longman TM 10- 2
Historical Development of the Banking Industry
Outcome: Multiple Regulatory Agencies1. Federal Reserve2. FDIC3. Office of the Comptroller of the Currency4. State Banking Authorities
Copyright © 2001 Addison Wesley Longman TM 10- 3
Federal Regulation
• 1913 - Federal Reserve System created• The economic collapse of the banking system
during the Great Depression ushered in additional regulation.– 1933 - Federal Deposit Insurance Corporation (FCIC)
formed
– 1933 - Glass-Steagall Act of 1933 separating out commercial banking from investment banking
Copyright © 2001 Addison Wesley Longman TM 10- 4
Structure of the Commercial Banking Industry
Copyright © 2001 Addison Wesley Longman TM 10- 5
Ten Largest U.S. Banks
Copyright © 2001 Addison Wesley Longman TM 10- 6
Branching Regulations
Branching Restrictions: McFadden Act (1927) and Douglas Amendments (1956)
Very anti-competitive results
Response to Branching Restrictions
1. Bank Holding Companies (BHCs)
A. Allowed purchases of banks outside state
B. BHCs allowed wider scope of activities by Fed
C. BHCs dominant form of corporate structure for banks
2. Nonbank Banks
Not subject to branching regulations, but loophole closed in 1987
3. Automated Teller Machines
Not considered to be branch of bank, so networks allowed
Copyright © 2001 Addison Wesley Longman TM 10- 7
Bank Consolidation and Number of Banks
Copyright © 2001 Addison Wesley Longman TM 10- 8
Bank Consolidation and Nationwide Banking
Bank Consolidation: Why?1. Branching restrictions weakened2. Development of super-regional banks
Riegle-Neal Act of 19941. Overturns McFadden and Douglas - allows for
full interstate branching2. Promoted further consolidation due primarily to
economics of scale (Examples: Bank of America and Banc One)
Copyright © 2001 Addison Wesley Longman TM 10- 9
Future of Industry Structure in the United States
• Fewer and larger commercial banks• We will become more like other countries, but not
exactly similar due the effects of historical realities
• Research work expects several thousand institutions in the U.S. rather than the more typical several hundred
Copyright © 2001 Addison Wesley Longman TM 10- 10
Cons:1. Fear of decline of small banks and small business lending2. Fear of monopoly by public (no such fear by experts)3. Rush to consolidation may increase risk takingPros:1. Community banks have and will continue to survive2. Increased competition for banks means consumers gain
the benefits of competition among suppliers3. Increased diversification of bank loan portfolios will
lessen the likelihood of bank failures
Bank Consolidation and Nationwide Banking
Copyright © 2001 Addison Wesley Longman TM 10- 11
Separation of Banking andSecurities Industries
Erosion of 1933 Glass-Steagall Act provisions over time
Copyright © 2001 Addison Wesley Longman TM 10- 12
Gramm-Leach-Bliley Financial Services Act of 1999
The Repeal of Glass-Steagall1. Allows securities firms and insurance companies to purchase
banks
2. Banks allowed to underwrite insurance and engage in real estate activities
3. OCC regulates bank subsidiaries engaged in securities underwriting
4. Fed oversee bank holding companies under which all real estate, insurance and large securities operations are housed
5. Banking institutions become larger and more complex
Copyright © 2001 Addison Wesley Longman TM 10- 13
A Brief Overview - The Thrift Industry
Beyond commercial banking…• Savings and Loans Associations• Mutual Savings Banks• Credit Unions
Copyright © 2001 Addison Wesley Longman TM 10- 14
Savings and Loans
Regulators
1. Office of Thrift Supervision
2. Federal Home Loan Bank System (FHLBS)
3. FDIC’s Saving Association Insurance Fund (SAIF)
4. State banking authorities
Structure
1. Fewer restrictions on branching
2. Strong vestiges of “single-purpose” origin
Copyright © 2001 Addison Wesley Longman TM 10- 15
S&Ls - Assets and Liabilities
• Primary Assets for S&Ls – Mortgages (60.1%)– US Govt and Federal Agency Securities (15.5%)– State and Local Bonds (6.2%)– Consumer credit (4.6%)– Loans to business are only 1.9%.
• Primary liabilities for S&Ls– Small time and savings deposits (41.4%) – Checkable deposits (16.4%)– Borrowings from the Federal Home Loan banks and other banks
(14.2%)– Large time deposits of over $100,000 (10.2%)
Copyright © 2001 Addison Wesley Longman TM 10- 16
Mutual Savings Banks
Regulators
1. FDIC
2. States
Structure
1. 400 or so and similar to S&Ls
2. Within state branching, regulations not restrictive, so there are few small MSBs
3. Located primarily in the Northeast US
4. May insure deposits with the FED: S&Ls may not
5. Not as heavily invested in home mortgages as S&Ls
Copyright © 2001 Addison Wesley Longman TM 10- 17
Credit Unions
Regulators1. National Credit Union Administration (NCUA)2. States
Structure1. Because must have “common bond” among
depositors2. Tax exempt status linked to “common bond”3. Mostly institutions are small with deposits < $10
million
Copyright © 2001 Addison Wesley Longman TM 10- 18
Credit Unions
Rapid growth over the last few decades…U.S. Assets in 1980 $68,974 mU.S. Assets in 1990 $221,759 mU.S. Assets in 1996 $336,452 m
Worldwide in 1996• 36,244 Credit Unions• 89,658,210 Members• $379.3 billion (U.S) in Assets
Copyright © 2001 Addison Wesley Longman TM 10- 19
Credit Unions
• Primary Assets for Credit Unions – Consumer Installment Loads (39.6%)
– Home mortgage and equity loans (25.3%)
– US Govt and Federal Agency Securities (18.9%)
– Time and Savings Deposits (4.9%)
• Primary liabilities for Credit Unions– Small time and savings deposits (82.1%)
– Checkable deposits (11.34%)
– Large time deposits of over $100,000 (4.8%).
Copyright © 2001 Addison Wesley Longman TM 10- 20
Separation – Other Countries
Separation in Other Countries1. Universal banking: Germany2. British-style universal banking3. Japanese-style separation
Copyright © 2001 Addison Wesley Longman TM 10- 21
International Banking
• Spectacular growth over the last 40 years1. Rapid growth of international trade and multinational
corporations2. Banks abroad can pursue profitable activities that are
precluded by the regulatory environment in home country
3. Tap into Eurodollar market
Copyright © 2001 Addison Wesley Longman TM 10- 22
International Banking
U.S. Banks Overseas1. Regulators
A. Federal Reserve (Regulation K)2. Structure
A. Edge Act CorporationsB. International Banking Facilities
Copyright © 2001 Addison Wesley Longman TM 10- 23
International Banking
Foreign Banks in U.S.1. Regulators
Same as for U.S. domestic banks under the International Banking Act of 1978Foreign Bank Supervision Act of 1991
2. StructureA. 500 offices in U.S.B. 20% of total U.S. bank assets
Copyright © 2001 Addison Wesley Longman TM 10- 24
Ten Largest Banks in the World
Copyright © 2001 Addison Wesley Longman TM 10- 25
Financial Innovation and Declinein Traditional Banking
Innovations Increasing Competition
1. Money market mutual funds
Avoids deposit rate ceilings and reserve requirements
2. Junk bonds
Result of better information in credit markets
3. Commercial paper market
Result of better information in credit markets and rise in money market mutual funds
4. Securitization
Result of better information in credit markets and computer technology
Copyright © 2001 Addison Wesley Longman TM 10- 26
The Decline in Banks as a Source of Finance
Copyright © 2001 Addison Wesley Longman TM 10- 27
Bank Profitability
Copyright © 2001 Addison Wesley Longman TM 10- 28
Share of Noninterest
Income
Copyright © 2001 Addison Wesley Longman TM 10- 29
Disintermediation – the decline of Traditional Banking
Loss of Cost Advantages in Acquiring Funds (Liabilities)Disintermediation occurred due to
1. Deposit Rate Ceilings and Regulation Q
2. Money Market Mutual Funds
3. Foreign banks have cheaper source of funds: Japanese banks can tap large savings pool
Loss of Income Advantages on Uses of Funds (Assets)1. Easier to use securities markets to raise funds: commercial paper,
junk bonds, securitization
2. Finance companies more important because easier for them to raise funds
Copyright © 2001 Addison Wesley Longman TM 10- 30
Bank Failures
Copyright © 2001 Addison Wesley Longman TM 10- 31
Banks’ Response
Loss of cost advantages in raising funds and income advantages in making loans causes reduction in profitability in traditional banking
1. Expand lending into riskier areas: e.g., real estate
2. Expand into off-balance sheet activities
3. Creates problems for U.S. regulatory system
Similar problems for banking industry in other countries